Finance Learnsmart Exam 2

b,c

The possibility that errors in projected cash flows will lead to incorrect decisions is known as: (more than 1) (a) guess an bless (b) estimating risk (c) forecasting risk (d) managerial incompetence

(b) 1986 Tax Reform Act

The rules for depreciating assets for tax purposes are based upon provisions in the: (a) 1986 IRS Act (b) 1986 Tax Reform Act (c) SEC Act (d) 1986 Sarbanes Oxley Act

a,d

cash flows used in project estimation should always reflect: (more than 1) (a) cash flows when they occur (b) financing costs (c) accounting values (d) after tax cash flows

advantage

An ________ of the payback period rule is that it is easy to understand

(b) 100% reversed

If a new project requires an investment in net working capital when it is launched, then at the end of the project, NWC will be (a) ignored (b) 100% reversed (c) charged against the project again (d) 50% reversed

a, c, d

In general, NPV is______ (more than 1) (a) positive for dicount rates below the IRR (b) positive for discount rates above the IRR (c) equal to zero when the discount rate equals the IRR (d) negative for discount rates above the IRR

(a) it examines how sensitive a particular NPV calculation is to changes in underlying assumptions

In the context of capital budgeting, what does sensitivity analysis do? (a) it examines how sensitive a particular NPV calculation is to changes in underlying assumptions (b) it examines the increase in the cost of a project when the cost of capital increases (c) it examines the sensitivity of management to the possibility that a project will be rejected (d) it examines the sensitivity of profits to changes in market share

(b) relevant

One of the most important steps in estimating cash flow is to determine the ____________ cash flows (a) specious (b) relevant (c) operating

b,d

Side effects from investing in a project refer to cash flows from: (more than 1) (a) opportunity costs (b) beneficial spillover effects (c) sunk costs (d) erosion effects

d) have already occurred and are not affected by accepting or rejecting a project

Sunk costs are costs that __________ (a) relate to other projects of the firm (b) cannot be measured (c) will not contribute to profits in the long run even if a project is accepted (d) have already occurred and are not affected by accepting or rejecting a project

(c) $5.94

What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107 and a discount rate of 6 percent? (a) $6.17 (b) $12 (c) $5.94 (d) $11.32

(b) 1

What is the total number of inputs that change while doing sensitivity analysis? (a) all inputs change (b) 1 (c) 0

a,c

When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in: (more than 1) (a) asking what if questions (b) rocket science (c) scenario analysis (d) fruitless endeavors

a,b,c

a manager has estimated a positive NPV for a project. What could drive this result? (more than 1) (a) overly optimistic management (b) the cash flow estimations are inaccurate (c) the project is a good investment (d) management rationality

(a) accepted

a project should be _______ if its NPV is greater than 0 (a) accepted (b) delayed (c) rejected

b,d

an option on a real asset rather than a financial asset is known as a: (more than 1) (a) forward option (b) real option (c) tangible option (d) managerial option

(b) uncommon

in a competitive market, positive NPV projects are: (a) unlimited (b) uncommon (c) easy to find

(d) upper and lower bounds

in order to analyze the risk of a project's NPV estimate, we should establish ______________ for each important estimate variable (a) average values (b) maximum and minimum values (c) most likely and least likely values (d) upper and lower bounds

(a) direct

incremental cash flows come about as an _____________ consequence of taking a project under consideration (a) direct (b) sporadic (c) indirect

a,d,e

once cash flows have been estimated, which of the following investment criteria can be applied to them? (more than 1) (a) payback period (b) YTM (c) the constant growth dividend discount model (d) IRR (e) NPV

c,d,e

operating cash flow is a function of: (more than 1) (a) salvage value of equipment (b) initial investment in equipment (c) taxes (d) depreciation (e) EBIT

(a) $40

suppose a project's operating cash flow is $150. The firm anticipates a $30 investment in net working capital and $80 in capital spending. What is the project's cash flow? (a) $40 (b) $150 (c) $70 (d) $120

c,d

the goals of risk analysis in capital budgeting include: (more than 1) (a) determining the correct discount rate (b) zeroing in on the correct NPV (c) identifying critical components (d) assessing the degree of financial risk

(b) future

the profitability index is calculated by dividing the PV of the ______ cash inflows by the initial investment (a) positive (b) future (c) previous

(a) incremental

the stand alone principal assumes that evaluation of a project may be based on the project's ___________ cash flows (a) incremental (b) differential (c) add-on (d) net

a, b, c

which of the following methods of calculating the MIRR of a project

b, d

which of the following present problems when using the IRR method? (more than 1) (a) high discount rate (b) mutually exclusive projects (c) larger cash flows later in the project (d) non-conventional cash flows